• All-Star Welfare Bums

    by Tyler Dellow • December 5, 2009 • Uncategorized • 26 Comments

    There are, by my count, now nine contracts that have been signed in which the player a) gets huge money up front with some years tacked on cheaply at the end and b) is not reasonably expected to play out the cheap years on his contract.

    I read Elliotte Friedman’s piece a while ago talking about how the players were all upset about the escrow provisions in the CBA. That’s never made any sense to me – I agree with Tom Tango on the point and think that the membership of the PA would probably benefit from some remedial education. The thing that would really drive me nuts if I was a player are the contracts being signed by players that are backloaded with some cheap years tacked on at the end to keep the cap number down.

    I’ve been told that many people have a basic sense of fairness that they rely on in evaluating things. This method of evaluation is founded on something other than what the document governing their relationship with someone else says. Having heard this from a variety of non-lawyers, I believe that there may well be some truth to it. If you’re the sort of person who sees the world that way, there’s a pretty strong argument that what the players signing these long-term contracts aren’t treating the collective fairly.

    The basic fairness of averaging the salaries contained in a contract for salary cap purposes is that while players might take more from the pool than their cap hit in some years, in other years, they’ll take less. Take Shawn Horcoff as an example. He’s a cap hit of $5.5MM annually. This year he makes $7MM. In a few years, he’ll make $3MM. If you’re a player who has to kick some money back into escrow this year because Horcoff’s salary is greater than his cap hit, you know that in a few years, Horcoff will be eating up more salary cap than he’s taking in salary, which is of benefit to the rest of the players. From the perspective of the players, the entire system is premised on the idea that contracts will be signed in good faith, with an intention to play them out. Uberrima fides.

    In the past few years, we’ve seen a number of contracts signed in which there’s a year or two tacked on to the end of the contract at a very cheap rate in order to reduce the cap number down. It’s widely speculated – and seems reasonable to me to think – that these players won’t play out the cheap final years of their contracts. They’ll simply retire before the really cheap years at the end. Vincent Lecavalier, Roberto Luongo, Marian Hossa, Henrik Zetterberg, Chris Pronger, Daniel Alfredsson, Mikka Kiprusoff, Marc Savard and Johan Franzen have all signed deals like that.

    What makes these deals unfair to the rest of the players is that these nine guys are sucking up more salary than they take in cap hit right now, but they (presumably) aren’t planning to pay it back to the collective at the end by taking fat cap hits while pulling down small salaries. These guys will pull out large salaries in the present, giving their teams more cap room and playing in the cities that they want to be in but neither they nor their teams will pay the price down the road for their presence now.

    I put together a chart to look at what this actually costs. As always, it’s complicated.

    frontloaded

    OK – explanation of the chart. All of the numbers are in $MM. The first column headed salary is the salary for those players in the 2010-11 season. Cap hit is their cap hit for that season; “Dif” is the difference. Very straightforward. To use Luongo as an example, he’ll be paid $10MM in 2010-11, with a cap hit of $2.273MM. Collectively, those nine players will pull in $21.283MM more in salary next year than they will cost in terms of cap hit.

    If you assume that none of these players will play for less than $2MM – which seems entirely reasonable to me – you can put together the following summary of their impact on the system over the next ten seasons:

    frontloaded2

    That’s a pretty staggering number you see at the end – these nine players, assuming that they play until their contracts call for stipends of less than $2MM, will pull in $73.524 than they’ll cost in terms of cap hit. $7.35MM annually, albeit heavily frontloaded.

    Why does this matter? Well, that money has to come from somewhere. The players have a fixed piece of the pie. When someone games the system to make his salary exceed his cap hit in the long term, he does it by taking money out of the pockets of the other players.

    I’ve struggled with the proper way to do this in terms of figuring out the cost to the collective as a whole, but it seems to me that the $7.35MM figure is the proper one to use in terms of putting a dollar figure on the cost of what these players are doing – it accounts for the fact that the plan was for a system that allowed greater salaries in some years than others. The objectionable part of what the Frontloaded Nine are doing is planning to take out more dollars than they account for in cap hit. On my assumptions, that’s $7.35MM annually that they’re taking from their brethren.

    In the grand scheme of things, $7.35MM isn’t a ton of money. If we make the (extremely safe) assumption that the players will be returning money to the owners in 2010-11, the question becomes how much each player is going to be paying so that the Frontloaded Nine can play where they want on terms favourable to their team.

    According to the Boston Globe, on last season’s revenues, the players were entitled to $1.492B in salary (I believe that this should be salary and benefits). The owners paid out $1.73B in salary. They were entitled to claw back the difference (which the author somehow calculates at $208MM) from the players. On those numbers, a given player’s contract actually put 88% of the face value into his pocket.

    The cost to an individual player for this depends on the amount that gets paid out in escrow. Escrow is basically a regressive tax – you get taxed the same percentage of your income, regardless of the value of your contract. I’ve done the calculations based on the Globe figures of player entitlement to $1.492B in salary to figure out what these contracts are costing the players as a whole per $1MM in salary. If, for example, the players were paid $1.75B in salary, the cost to the players of the contracts signed by the Frontloaded Nine will be $4200.00/$1MM in salary. If you look at the range of likely reasonable outcomes, I think an estimate of $4100.00/$1MM to $4300.00/$1MM is pretty reasonable.

    When considering anything NHL related, my first thought is always “…But how does this affect Shawn Horcoff?” How much cash will come out of Shawn Horcoff’s pocket next year so that Vancouver, Detroit, Chicago, Boston, Tampa, Calgary, Philadelphia and Ottawa will have better teams than they otherwise would? To what extent is he subsidizing the decisions made by those players? Well, on my math (and his $6.5MM salary next year), the answer is somewhere between $27K and $28K. Bad enough that Chris Pronger and his wife hated Edmonton – Horcoff will be kicking money into the pot so that they can live somewhere less objectionable.

    Will he be able to keep a roof over his family’s head? Most likely. Is it fair that he’s subsidizing lifestyle choices for certain players and so that certain cities can maintain better teams than they otherwise would? I don’t see how you can possibly make that argument.

    If I was a member of the NHLPA, particularly if I was a blue collar, lunchpail, three or four year career guy, this would bother to me no end. Escrow is simply something that occurs because the players have agreed that salaries would be a fixed percentage of revenues. It’s undoubtedly part of the deal. A special class of players and teams have hit on a way to have their decisions subsidized by the players as a whole. That would bother me a whole lot more. If this trend grows – and Duncan Keith’s contract is certainly arguable in terms of falling into this class, the amount of tax borne by the players who don’t have these types of deal will increase.

    I make no moral judgment of this – it’s a dog eat dog world and these deals are within the rules of the game. This is simply an example of the elite players being able to shift some of the burden of the salary cap to other players – a function of relative bargaining powers. It’s not fair though and, for the vast majority of the NHLPA, negotiating a provision in the next CBA that either requires flat salaries or caps contract lengths would probably be extremely beneficial. I’m broadly in agreement with Tom Benjamin that the NHLPA doesn’t really serve a purpose in a capped NHL – this is just another example of how it pits the players against one another. If I was negotiating the new CBA, I’d have this issue lined as something to give the owners as a win.

    About Tyler Dellow

    26 Responses to All-Star Welfare Bums

    1. December 5, 2009 at

      I would say if you’re *not* the sort of person who has a sense of innate fairness, you’re the exception, and a very exceptional exception at that. It’s not just people who have a sort of fairness module; there’s plenty of evidence other primates do as well.

      This is an interesting take, and I’m guessing that what you say about what players think of escrow is due to a couple of things. First is, they’re young. People in their early to mid-20s just don’t think the same way older fellers like you and I do about the future. Second is, let’s face it, even the guys with college degrees didn’t necessarily go to college to get schooled. Many have a high school degree and no more. Your average NHLPA constituent is just not that well-educated, and I would argue that intelligence is probably not a primary selector at the draft, or at least, it hasn’t been.

      This is not to say that I think your average NHL player is a shallow, vacuuous moron who needs others to do his thinking for him, but I do suspect that most members of the NHLPA are unlikely to be in any danger of having their time distracted by MENSA meetings. George Parros, Shawn Horcoff, and even Brian Burke – these guys are rarities. The NHLPA membership should be leaning hard on the Georges and Shawns of the league, since it seems clear they’re unable to pick a non-hockey leader.

    2. Dennis
      December 5, 2009 at

      I’m just gonna look at this from a fan’s perspective and I like these uneven contracts as a way for teams to be able to keep their players in-house.

      Now, sure, Hossa was a guy who signed this contract while skipping from one club to another but for the clubs that actually have a lot of cash on hand and could go over the cap if allowed, this is a nice way to be able to pay out a lot of cash up front while keeping down the cap hit and improving their club.

      Now, sure, this isn’t what you’re talking about but when I saw the Savard pact, I thought good on the B’s for using the hole provided and good for their fans who know that Savard will be around for awhile; or that at least he’ll be affordable or a bargain for as long as he’s productive.

      Not to mention that he could eventually be a great trading chip for a team that on the cheap that needs a guy to get them to the cap.

    3. OilW30
      December 5, 2009 at

      Nice analysis. Pass that to Ron Maclean. Maybe what they need to do is add a rule to the next CBA saying that the payment range on a contract must be within a certain % or something, so that you couldn’t have a $10m year and a $1m year in the same contract.

    4. OilW30
      December 5, 2009 at

      By the way, MikeP: primates don’t have an innate sense of fairness because they don’t have a reflective capacity for deciding between right and wrong. No one says that primates have morality; what they say is that certain animal instincts point to the biological basis for human moral behaviour. And that’s not news to anyone: Aristotle knew that bees are “gregarious,” and Aquinas argued that we share the second precept of the natural moral law–”preserve the species”–with animals because it derives from our animal nature. The difference is that we can reflectively choose to follow our instincts (or not).

    5. December 5, 2009 at

      Excellent post Tyler. I really hadn’t thought about the impact these contracts have on the players as a whole before. My natural tendency is toward the attitude Dennis has (What’s best for the fans? What’s best for the teams?) so I always appreciate when someone takes the side of the players, especially the players as a group. Lord knows they have trouble doing it themselves.

    6. December 5, 2009 at

      Excellent post.

    7. Schitzo
      December 5, 2009 at

      The other solution would be to change the rules so that the burden is borne by the team that hands out the contracts, instead of the players.

      Look at Luongo for an example. He has three years where he’s likely to retire rather than play, which have a difference between cap hit and actual salary of $3.7, 4.3, and 4.3.

      So he’s essentially “stolen” $12.3 million from the player pool as a whole. Well, who benefits from tacking on those extra years? The Canucks organization.

      So, assuming Luongo retires as expected, make the Canucks pay $12.3 million to the league. Count it as general revenue. All the other players get a windfall to make up for subsidizing Bobby Lou earlier in the decade.

    8. Schitzo
      December 5, 2009 at

      Whoops, you couldn’t account for it as general revenue, or the owners would get to keep 45% of it. It goes straight into the player portion of the pool.

      Note that this would, in essence, mean the league is allowing richer teams to “buy” a lower cap hit for their players. If you’re Phoenix, maybe you don’t like my suggestion.

    9. mc79hockey
      December 5, 2009 at

      Schitzo – Yeah, something like that idea is probably fair. At the very least, it’s preferable to what we have now.

      It’s too complicated though, I think. The easiest thing is just to tighten up the rules about salaries varying from cap hit.

    10. speeds
      December 5, 2009 at

      Why vary the cap hit though? Why not just have the cap hit match the salary paid?

      Sure it could result in weird salary differences between years (though that still happens now), but at least that way every dollar is accounted for, and easily.

    11. mc79hockey
      December 5, 2009 at

      Speeds – the concern with that is with teams loading up on talent for a year or two by signing deals like 1MM-5MM-5MM so as to limit the cap consequences one year.

    12. speeds
      December 5, 2009 at

      Of course, I just wonder if it would be much “worse” than the way things are now? You’d think volatility in the standings in that case, but I’m not sure if that is a bug or a feature to the NHL and/or NHLPA?

      Seems like the easiest thing to do would be to mandate a flat averaging to salary.

      What I think the NHL could, but won’t, do in the next CBA is treat retired players like buyouts in terms of the cap consequences. When you buy a player out, you have to account for the difference between what you paid and what you charged to the cap. If the Oilers buy out Nilsson next summer, they will get credited for the extra 500K they were charged last season (2.0 mil cap hit) vs. his 1.5 mil salary.

      So, if a team “saved” 10 million in cap hits over 5 or 6 years because they spent 40 million on a player but were only charged 30 mil against the cap, then in the next CBA put in a clause that if such a player retires the team has 10 mil in dead cap space over the next couple of years.

    13. December 5, 2009 at

      I’d look at escrow a lot like the way we handle income taxes, at least in the US. Here in the US, it really sucks when your employer didn’t withhold enough from each paycheck to cover your income tax for the year. Even if you owe a total of say $2500, and your employer already withheld $2400, so you’re only out $100, that’s still a pain in the ass, and a random unexpected bill, which no one likes. Instead, people prefer for the withholding to maybe end up at $3000, so it feels like you get back a $500 bonus.

      It all ends up the same, and from a purely financial sense, the “bonus” is actually a negative, because it amounts to an interest free loan to the govt, but to people it doesn’t really feel that way. The league-wide disdain for escrow is much the same, but with bigger numbers involved and wildly more inaccurate withholding projections.

      I think its nearly a given that the new CBA will have some sort of way to limit the variance in pay within a contract. Restricting it so that you can’t make those wild fluctuations will fix a lot of problems, including this one.

    14. macndub
      December 7, 2009 at

      “I’ve been told that many people have a basic sense of fairness that they rely on in evaluating things.”

      Ha ha ha ha! People except bankers in addition to lawyers.

      MC, it gets worse when you add a little economics. What is the present value of a front-loaded salary? Definitely higher than the same salary as an average over the term, especially when you consider that the uncertainty of the escrow repayment increases with time.

      So Horcoff, in paying more to CFP now, actually loses even more in present value terms. Now, he makes up for it a bit in frontloading his own salary, but you see the kind of death spiral that results if everyone were to play this game rationally.

      In fact, it seems as though salaries are getting more frontloaded (but this is just an impression). And it will get worse, making a mockery of the whole cap system. Especially since the player’s discount rate is quite high, much higher than the team’s I would argue. The player has all of his expected net worth invested in a single, wasting asset that can depreciate to zero with the next elbow to the head.

      With that risk profile, I want my money today. The gaming of the CBA amplifies that tendency: not a good thing.

    15. December 7, 2009 at

      Great post.

      I really think that Bettman and Co. are going to try and bring a term limitation ala the NBA into the next CBA. I believe the NBA’s maximum term is 6 years (don’t quote me on that ). So, while this won’t directly help to fix the problem it would help to limit these instances–or at least the huge range–because you’d have to put the money somewhere in a six-year deal and the NHL does still have the 35+ older rule.

    16. Jeff
      December 7, 2009 at

      But is it fair that the ‘elite’ players also drive a larger part of the marketing and merchandising revenue? They may get paid more and take more out of the communal pie, but it’s also because of them that people buy tickets.

      Without Vincent Lecavalier, Roberto Luongo, Marian Hossa, Henrik Zetterberg, Chris Pronger, Daniel Alfredsson, Mikka Kiprusoff, Marc Savard and Johan Franzen, does a league with mostly Shawn Horcoffs make as much revenue? I say no.

    17. Quain
      December 7, 2009 at

      First of all, really? Lecavalier is spearheading a failing franchise in Tampa, and more than half those guys are incredibly dull. If Johan Franzen goes to Europe, does anyone give a damn? Hell, Zetterberg? I think they’re good players, but in terms of them driving a casual fan’s viewership, are we really ready to attributed a number significantly higher than, say, Daniel Carcillo?

      Second, how is merchandising revenue split? I assume there’s a cut between the NHL and the NHLPA, but after that how does the PA dole it out? If Crosby sells six million jerseys, I can’t imagine that he doesn’t get some sort of weighted percentage of that in kickbacks.

    18. macndub
      December 7, 2009 at

      @Jeff, you are correct. But that’s why an NHLPA exists: Pisani earns more than he would without a union, and Lidstrom earns less. Without those elite guys, the NHLPA wouldn’t have a bargaining position. Which begs the question as to how the union can survive long term, but it seems that sports players unions have never been particularly strong, so there we have our answer.

    19. Tach
      December 7, 2009 at

      MC,

      Wouldn’t another solution be to adopt the “old player retirement rule” for everybody. If the player retires before the end of his contract, the team still eats the cap hit. This would effectively lower the total cap allocatable to future players, thereby allowing those jobbed out of income in the front end of the front loaded contracts to recoup it on the back end.

      The only problem I can see (aside from the inevitable managerial incompetence, see Flyers, Philadelphia) is that the guys who have short careers may not be around in the long run to get in to the made up years.

    20. Schitzo
      December 8, 2009 at

      This would effectively lower the total cap allocatable to future players, thereby allowing those jobbed out of income in the front end of the front loaded contracts to recoup it on the back end.

      Tach, the problem with this is that there’s likely some relation between a lower salary cap and lower actual dollars spent. If a team has $6 million in dead space, they are working with a cap of $50 million. They still need 23 players, so one of two things will happen:

      1) They will front-load a bunch of contracts and spend more real dollars, meaning another generation of players gets their own front-loaded deal; or

      2) They’ll just spend less on players.

      Even if they do some minor front-loading and pay, say, $52 million that season, it’s still substantially lower than what they would have spent without the dead cap space. So the players actually earn less than they would have if we just left the cap space “alive”.

    21. Schitzo
      December 8, 2009 at

      I should clarify that last thought – if the penalized team only spends $50 million, it’s great for players on the other 29 teams as it means more escrow money coming their direction. It sucks for the 4th liners and role players on the penalized team, who will likely be given the choice of accepting the league minimum or playing in Europe.

    22. David Staples
      December 14, 2009 at

      Good post.

      Like MikeP, I wonder if the average player will get worked up about this.

      But there’s a simple issue around these massive, long term contracts that is going to become increasingly clear that the average player will get worked up about, I suspect.

      In the future, there will be more and more guys who aren’t very useful any more (Lecavalier, Hossa, Franzen in five years or six or seven years) who will be taking up a huge cap hit, which means the other guys can’t have that money.

      Imagine being on a team with Vinny or Hossa when he’s scoring 18 goals a year and taking up that massive cap hit.

      The players will get that this isn’t right or fair to them, that their teammate is grossly overpaid and at their expense, and that’s when the players might demand change.

      But, frankly, I think the number one issue for owners at the next negotiation is going to be this issue, so the players won’t have to raise, the owners will.

      They will move to limit contracts to four or five years, or at least to make it so you have to pay the same amount each year.

    23. Mikey
      December 22, 2009 at

      Nice site MC – hadn’t been here before :)

      My proposal for these longterm deals would be something like the following:

      Currently deals signed with a player 35 years and older result in the team being stuck with the cap hit for the duration of the contract.

      Since the NHL already has an abritrary number in place (35 years old) for certain deals to be signed, pick another one for when players can be expected to stop playing. (I’m guessing you probably see a huge drop off after 37 or 38 years old).

      So let’s say the number is 38 – structure the CBA in such a way that when a deal is signed before a player is 35 the team is on the hook for the full cap hit for all years signed beyond 37 years old (or 38 or whatever) whether the player retires or not. So if you want to sign someone to a $6M cap hit till they’re 41? Fill yer boots – but that’s $6M from your cap space, regardless of how you structure the salary.

    24. July 21, 2010 at

      Might as well just steal my response at LT’s wholesale.

      =====

      The time for the NHL to get their knickers in a twist over these deals was two or three years ago, when the obvious circumvention started. Now they once again look like hypocrites, making shit up after the fact as it suits them, over some largely arbitrary distinction. Sure, guys playing to 44 is rare, but it’s also rare at 42, at least so far. Who knows whether 40 becomes the new 35 for this generation of NHLers? Actually, I think that’s very possible, given the effect of improved training.

      The way to get rid of these — and I think we all agree they need to go — is to make it so that no single year can be more than double or less than half of the average cap hit. So all the “cap circumvention” years would still have to be, in Kovy’s case, $3M (probably more, given that he still wants to get paid) rather than $0.55M.

    25. July 21, 2010 at

      Is it right to put Pronger in this group since his cap hit will stay on the books even if he decides to retire because it is a 35+ contract?

    26. RobC.
      July 22, 2010 at

      brilliant article. just a fascinating explanation of this whole thing. how come i dont know your name?

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